Europe Declaring War on FASB?

Ongoing harmonization plan hits a sour note; head of U.K. finance directors' group says he won't sacrifice his principles. Elsewhere: Actuate's FAQ surprise, Merrill's new CFO.


So much for the truce hammered out by the U.S.-based Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Board (IASB).

Two months ago, reported the heads of both bookkeeping bodies asked their staffs to select the better accounting standard in each of 15 areas. The boards will then make a formal decision on how to proceed following public comment. The stated goal: to harmonize accounting standards by 2005.

Now it looks as if the Europeans are not overly thrilled with the arrangement—and are openly trying to alter the process.

On Monday, Mark Armour, chairman of the FTSE 100 group of U.K. finance directors, said convergence between international and U.S. financial-reporting rules should lead to principles-based accounting standards—the type of standards used in Europe. FASB leans toward standards-based rules.

“It is possible that, in pursuit of convergence, we might see accounting standards that reflect compromise and may seem unhelpful or alien in a U.K. environment,” Armour told “We have a sensible accounting regime, the IASB is adopting a principles-based approach, and that should not be sacrificed on the altar of convergence on a global basis.”

Bear in mind that most listed companies in the European Union must adopt international accounting standards in 2005.

Earlier this month, the IASB published a draft accounting standard that would require stock options to be expensed and deducted from earnings.

Interestingly, Armour, finance director of Reed Elsevier, turned magnanimous when it came to the IASB’s proposals regarding options. “Given the significant accounting scandals and boardroom excesses in the U.S., this accounting proposal has a certain inevitable feel about it,” he stated. “I think many would say it is time to get this one behind us.”

Indeed, on Monday, FASB requested comments on the similarities and differences between its rules for treating stock options and proposals made by the IASB.

And yet another (European) precinct was heard from on Monday. The chief financial officer of Nokia warned about the risks of having two sets of accounting standards. He also took a jab at the current FASB/IASB plan to select the best accounting treatments in 15 different areas.

“I see a danger of bipolarization when it comes to global accounting,” Olli-Pekka Kallasvuo told a corporate-governance seminar, according to Reuters. “There should be a really strong effort to make global harmonization possible. We need less discussion on whose rule is better…[and] more on how to make [harmonization] possible.”

Probably so. Nonetheless, the European Commission has asked U.S. officials to permit EU companies quoted on U.S. exchanges to continue using international accounting standards (IAS) instead of generally accepted accounting principles (GAAP).

The feeling among many critics on the continent is that GAAP contributed heavily to the rash of accounting scandals because it is too specific and rigid. They claim the approach led companies to interpret the letter of the law rather than the spirit of the law.

Merrill Lynch Names New CFO

Merrill Lynch named CFO Thomas Patrick executive vice chairman, responsible for finance and administration.

Ahmass Fakahany will succeed him as CFO, effective immediately.

Patrick will continue as a member of the company’s operating and executive management committees, while Fakahany will become a member of the operating committee and continue to serve on the executive management committee.

Patrick had been executive vice president and chief financial officer of Merrill Lynch & Co. since 2000. Fakahany had been senior vice president and chief operating officer of the company’s global markets and investment-banking business since 2001.

“Tom Patrick was an architect of our recent restructuring, which has positioned Merrill Lynch for improved financial performance across market cycles,” said Stan O’Neal, president, chief operating officer, and chief executive officer—elect, in a statement.

O’Neal, once the CFO at Merrill, is slated to replace current Merrill CEO David Komansky in December. O’Neal will also assume Komansky’s role as chairman when Komansky retires in April.

Rumors of friction between the current CEO (Komansky) and his successor (O’Neal) began circulating shortly after O’Neal took over management of the investment bank and started replacing senior executives reportedly loyal to Komansky, including three who had competed with O’Neal for the president’s job. Both Komansky and O’Neal have dismissed talk of any rift between them.

In yesterday’s announcement, Merrill noted that the company’s new CFO, Fakahany, would report to Patrick. Patrick has advised major corporations on financing strategy, structure, and techniques, and is credited with co-inventing Merrill Lynch’s successful LYONs product. He joined Merrill in 1978 with the acquisition of investment bank White, Weld & Co. and previously served as CFO from 1989 to 1990.

Fakahany joined Merrill in 1987, and has served as finance director for Merrill Lynch & Co. as well as CFO for the bank’s Asia operations.

Fakahany takes over the top finance post at Merrill Lynch at a difficult time. The bank, like other Wall Street firms, has been laying off workers in droves of late.

In addition, Merrill Lynch has recently taken hits for allegedly pressuring its sell-side analysts to write positive reports about potential investment-banking clients. In May, Merrill, the largest investment bank in the world, agreed to pay a $100 million fine to settle conflict-of-interest charges filed by New York State Attorney General Eliot Spitzer.

Creative Confessions

Two companies under attack—Tenet Healthcare and Actuate Corp.—on Monday chose creative methods to announce in regulatory filings that they are either being investigated by the Securities and Exchange Commission or are the subject of an SEC action.

Tenet, which is being scrutinized for Medicare payments, said that it had an informal meeting last week with representatives from the SEC. It added the meeting was scheduled at the request of SEC representatives in the Pacific regional office.

The announcement came in the middle of an open letter to shareholders from chairman and chief executive officer Jeffrey Barbakow.

Barbakow said the discussion with the SEC focused primarily on the company’s outlier payments. But he indicated the talk also covered the unusually high trading volume in Tenet stock, and whether the company was aware of any unusual trading by third parties preceding Tenet’s announcements of recent developments.

SEC representatives stated that they had opened an informal file on Tenet, but had not opened a formal investigation, he added.

“We don’t know whether the SEC intends to launch a formal investigation,” he stated in the letter. “We will work closely and cooperate with them.”

Meanwhile, Nicolas Nierenberg, Actuate’s chairman and chief technology officer, subtly announced potential SEC action in a Frequently Asked Questions format.

“What is the nature of the potential SEC actions against Actuate and Mr. Nierenberg?” the company asked in a regulatory filing.

“This matter arises from the SEC’s lawsuit against Unify Corp. and two of its officers,” was the response.

The provider of information-delivery software products and services acknowledged the SEC has alleged that in 1999 and 2000 Unify and the officers engaged in a fraudulent scheme to overstate Unify’s revenue and earnings. The alleged scheme involved, among other things, improperly counting reciprocal transactions as revenue.

The filing added the potential action against Actuate and Nierenberg stems from two software-license transactions that Actuate completed with Unify in early 2000. “The potential action would allege that Actuate and Nierenberg violated, either directly or as an aider and abettor, certain provisions of the federal securities laws in connection with the transactions with Unify,” Actuate acknowledged.

It said Actuate and Nierenberg are cooperating with the SEC.

The company also insisted the Actuate-Unify transactions were entered into for valid business purposes, that Nierenberg and Actuate did not know of Unify’s alleged fraud, and that they “in no way aided or abetted Unify in its alleged scheme to overstate its revenue.”

In yet another SEC action announced Monday, the regulatory agency said the U.S. district judge for the northern district of Texas permanently enjoined Larry T. Ohms, the former treasurer of U.S. Lime & Minerals Inc., from future violations of the federal securities laws and from serving as an officer or director of a public reporting company.

The SEC charged Ohms with financial fraud and other securities-law violations related to his embezzlement of nearly $2.2 million from the company during a four-year period.

Ohms held a number of positions at U.S. Lime between January 1998 and December 2001, including corporate controller, secretary, treasurer, and vice president of finance. The SEC claims he forged the signatures of other company officers on dozens of checks and falsified the company’s check register to create the appearance that the amounts that he personally received or gave to his creditors went to vendors for U.S. Lime’s legitimate business expenses.

In addition, the complaint alleged that while Ohms initially embezzled relatively small amounts, his thefts escalated to the point where they were too large to conceal—at which point he abruptly resigned.

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